Many opinion pieces and financial articles have been written with handy tips to help invest your money. An issue with many of these is that the people reading them are, in all likelihood, of different ages and at different stages of life.

With this in mind we’ve broken down each decade to help you understand some of the financial considerations.

20–29 year olds

Many people have just entered the workforce at this stage and most people will still be renting. While some people in their twenties have formed long term relationships many have not had children. For the majority, home ownership and families are still a thing of the future.

The major financial focus for this group is to eliminate debt that may have been accumulated while at university/college (HECS–HELP, credit card debt, student loans etc.), and to start to save for a deposit on a home.

30–39 year olds

By the time most people are in their thirties, they are in long term relationships and a lot have had children. Many people during this period have bought their first home and some would even be considering renovations.

The major financial focus during this stage is usually on reducing mortgages as much as possible.

People in this age bracket need to be careful not to over extend themselves financially, and aim to keep money available for emergencies that are more likely to occur than when they were renting and had no children.

Those without children or a mortgage, who are looking to get ahead at this stage may consider investing in the share market.

40–49 year olds

It may sound obvious but the financial position in this period will be largely determined by how much spending restraint has been shown during the previous decade. For disciplined savers there is a good chance of being able to upgrade to a bigger home at this stage of life.

In saying that, the forties can be difficult for couples who have children in their teens as they generally incur more costs at that age, especially if they attend private schools. Careful budgeting is required for people in this position.

Those that don’t have children and have enough money for their day to day expenses may start thinking about diverting more of their money into superannuation.

50–59 year olds

By this stage many people will start experiencing more sustained wealth creation due to fewer family costs. The reason for this is because most will have children at an age where they are becoming financially independent.

Generally salaries are also higher in this bracket. Putting more savings in superannuation is very common when people are in their fifties given the current tax incentives that come with it. This is also an opportunity for many to start their own individual business.

60 and beyond

For people past 60, the main financial focus is to invest savings to generate a retirement income and maximise the age pension.

In summary

Regardless of which stage you are at, it’s important to make a financial decision based on the assessment of the risks and opportunities that exist in your life. As you can see, these seem to change with each decade.

We can help you find the right investment opportunities for your individual situation and for each life stage.

This document has been prepared by Colonial First State Investments Limited. This document is not advice and provides information only. It does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement available from the product issuer carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.

I returned to work last week even more optimistic than I was before I went, and not just because I was still glowing from the Bali sun.

While I was away the market rallied 2 per cent and although it’s looking ‘toppy’ and looks due for a pullback, I think we are now in the situation where buying on the dips is the best idea. The global recovery is on and, as I explained before Christmas, money is shifting back into equities around the world.

So bearing in mind Nassim Taleb’s dictum that “the only prediction one can safely make is that those who base their business on prediction will eventually blow up”, there are five reasons I am optimistic about 2013 without exactly predicting anything: China, America, Europe, Japan and Risk.

Risk

To start with the last of those, in my view 2013 will be a 'risk-on' year. Well to be honest this started half-way through 2012 when it became clear firstly that the global economy was recovering and secondly that the European Central Bank, with German support, really would do whatever it takes to keep the euro intact. The Fed was already doing whatever it takes to get the US dollar down, and the Reserve Bank was doing whatever it takes to get the Aussie dollar down (not that that’s working yet).

All of which means the returns from cash are miserable and falling. Time to invest then, which means taking more risk, but not too much – thus, bank shares returned 25 per cent in the second half of 2012.

In my view this trend has just begun. For five years investors everywhere have been more concerned with not losing their capital than with making a return and gradually that is changing; they are moving out along the risk curve. Obviously taking more risk means just that, and the world is not yet a safe place (is it ever?). I think the greatest danger has passed, and while deleveraging will continue to hamper growth there are many positives offsetting that.

China

Sam Walsh must be the luckiest man alive. Not that he doesn’t deserve to be chief executive of Rio Tinto – of course he does, in fact he probably should have taken over years ago (I’m sure he agrees) – but because he takes over just as China’s economy bottoms and turns around and with $14 billion in writedowns tied to Tom Albanese’s tail. All new chief executives would dream of having their troublesome assets all written off and their main customer on the improve.

The data on China that came out last week contained several positives, apart from the fact that growth, at 7.9 per cent, was better than expected. The transition towards greater consumption and less reliance on investment has continued, with consumption now accounting for 4 per cent of GDP growth in the fourth quarter, higher than gross capital formation (3.9 per cent). Growth in retail sales improved from 11.6 per cent to 12 per cent in 2012 and car sales grew 6.9 per cent (5.4 per cent in 2011). The acceleration in consumption happened because income growth, at 9.6 per cent in the cities, was greater than GDP growth for only the third time in a decade.

So the project of converting China from an export and investment driven economy to one that is based on domestic consumption is intact. Income growth is being helped by the remarkable fact that the working age population actually fell in 2012, by 3.5 million – the first such fall ever.

This brings its own challenges of course. It makes it even more imperative that the Chinese authorities reform the economy to promote the return on capital, otherwise economic growth will stall. The state owned enterprise system is deeply inefficient, as you’d expect, which has never mattered too much while the labour force has been growing so rapidly. As it declines, productivity must rise.

But while the long-term picture is clouded, it’s clear that 2013 will see China’s economy continue to accelerate, which should support the iron ore price – if not at $150 a tonne, then certainly above $120. Happy New Year Sam!

America

China is recovering and so is the United States, with housing leading the way. The National Association of Home Builders Housing Market Index is at a six-year high and double the level of January 2011. The “prospective buyer traffic” component of the index is at the highest level since January 2006. The median house price is up 10 per cent year on year, as is the volume of sales. Residential construction has bottomed and the vacancy rate is heading down.

Thanks largely to housing, the US private sector is growing at a pretty rapid clip – about 3 per cent if the government sector is removed from GDP calculation. State and local governments are starting to join the private sector in recovery, with only the federal government continuing to shrink. Moody’s expects local and state governments in the US to expand employment by 220,000 in 2013, a huge turnaround from the previous three years of job losses.

Manufacturing has been slow to move, but that seems to be now happening as well. Industrial production expanded 0.3 per cent in December after a rise of 1 per cent in November. But the December number was held back by a fall in utilities generation: factory output jumped 0.8 per cent in December. As for this year, cheap energy is expected to produce a resurgence of US manufacturing.

There’s a lot of talk that the budget deal will create a big headwind, but that seems to be overdone. There are two main elements to the deal that will produce fiscal drag: the payroll tax increase, which will cutGDP by about 0.7 per cent, and the spending cuts due to be implemented in March – another 0.6 per cent of GDP. That 1.3 per cent of GDP fiscal drag seems large compared to 2.2 per cent average GDP growth since 2010, but as Anatole Kaletsky points out the IMF calculates that US fiscal drag on the economy was 1.3 per cent in each of 2011 and 2012. In other words, fiscal drag in 2013 will be no greater than the previous two years.

That is, as long as the politicians don’t snatch defeat from the jaws of victory by sending the US into default because of the debt ceiling. They have about six weeks to raise the limit, since the government will run out of money on March 1. Surely they will, although as usual it will probably be at the last minute.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

Some Insurance companies offer income protection for those working 20 hours per week and above. And with women making up nearly half of the entire Australian workforce, and over half of those being part-time, this is great news.

In 2011, women made up 45 per cent of the Australian workforce with 80 per cent aged 20 to 54. Over half (52 per cent) of those work part-time, usually returning to work after having children or time spent studying.

Today there is an increasing number of dual income households, due to the high living costs associated with servicing debt, meeting childcare fees and maintaining a reasonable lifestyle. In many cases, both partners do not have income protection, with females often foregoing this cover, due to affordability issues.

In such cases, there are various options on offer to help make income protection more affordable, such as:
• waiver of premium when on maternity leave
• options for longer waiting period
• shorter benefit options
• essential Cover - accident-only income protection option - an inexpensive way to insure your income.

Part-time female workers are a major part of Australian society and income protection insurance should be a key part of their financial plan, just as it is for a household’s full-time breadwinner.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional insurance advice tailored to their specific circumstances prior to making any insurance decisions and should read the relevant Product Disclosure Statement.

I believe to write accurate investment strategy you have to forecast where capital will flow. I know that sounds an obvious statement, but too often in the professional investment world investors/analysts/strategists over complicate and over analyse very simple themes.

For the last nine months we have forecast that falling local and global cash rates would force savers out of cash and lead to sustainable dividend yields being bid down in the equity market. We believed all those who relied on investment income to live would be forced up the risk curve.

Australia has been late to this equity yield compression party because we previously offered acceptable returns in cash to savers who wanted to preserve capital. Yet, with the RBA crushing cash rates to 3.00% and banks lowering their margin on term deposits from a peak of 2.00% over swap to 1.20% over swap, post tax returns on unfranked term deposits are collapsing bringing an end to the “do nothing” investment strategy.

I believe you can sense a change in the RBA’s rhetoric where they are starting to follow the FED. The RBAhave basically told investors that they are going to have to acceptable higher risk to generate the returns they require. Whether that involves buying a rental property, equity dividend yield or corporate debt, I believe you can see the RBA is moving to force savers out of cash and into productive assets. As those asset prices rise it should in turn generate a rise in consumer and business confidence.

30% of Australian super funds are now self-managed. Data suggests around 30% of SMSF assets are currently held in cash or cash equivalents. 90% of all Australian bank term deposits are of 1yr year duration or less. Our strategic view is that wall of increasingly low return cash is going to move to higher income stream assets over the years ahead.

On that basis our research department, led by retail investment strategist Peter Quinton, ran a model comparing the after-tax returns from bank term deposit rates vs. other higher risk bank products. This is a really good piece of work.

In the table below we are comparing the return if you were to invest $100,000 in a: 12-month term deposit, a subordinated debt issue (sub—debt), a hybrid issue (hybrid), and the grossed-up fully franked dividend yield from the bank equity (shares). The table below compares the return based on 7/12/2012 the top marginal tax rate for individuals of 46.5%, the tax rate paid by Superannuation Funds (15%) and the tax rate paid by Superannuation Funds in pension mode (0%).

In this example we have assumed the interest on the term deposit will be paid at maturity and the rates are from Monday 26th of November. The equity yield is the estimated yield for fy13 based on Bell Potter research notes. The sub-debt referred to is subordinated debt; ANZHA, CBAHA, NABHA, WBCHA. The hybrids referred to are the mandatory convertible preference shares; ANZPC, CBAPC and WBCPC.

What I want to focus you on today is the differentiated after-tax returns between term deposits and bank equity dividend yield at the two superannuation tax rates. While the sub-debt and hybrid analysis is interesting, I want to focus on the equity vs. TD returns inside a super fund structure.

Six months ago we recommend investors get out of bank term deposits and into bank equity dividend yield. Of course at the time that call was criticised by the financial press who said we weren’t comparing apples with apples because there always should be an equity risk premium paid to investors in equity to compensate for volatility and risk. We completely agree, but as after tax returns get crushed in unfranked cash products we
believe the equity risk premium in terms of after-tax return premium offered by bank equity dividend yield is compelling, in fact, the equity risk premium is too high and likely to be bid down in the years ahead.

In the average 15% tax paying super fund the after tax return in pure income terms from NAB shares is 2.54x higher than currently offered by NAB TDs (9.52% vs. 3.74%). For those super funds in pension mode the after tax return in pure income terms from NAB shares is also 2.54x higher than currently offered by NAB TD’s (11.2% vs. 4.40%). In our lowest risk bank, CBA the after tax return in pure income terms inside a 15% tax paying super fund is 2.25x higher in CBA shares over CBA TD’s (7.65% vs. 3.40%). In a super fund in pension mode the after tax return in pure income terms is also 2.25x higher in CBA shares of CBA TD’s (9.00% vs. 4.00%). In other words, you are being paid a huge after tax equity risk premium (in income terms) to move from TD’s to bank equity.

It’s also worth remembering that this analysis is based off current TD rates. In the macro strategy we believe in we see the RBA taking the cash rate to 2.50% and banks offering around 120bp over swap for 1yr term deposits. That equates to 1yr TD rates of 3.70% at some stage next year. When TD’s have a “3 handle” the switch to equity dividend yield will accelerate.

The analysis above also reminds you of the after tax return power of franking credits inside a superfund structure, particularly one in pension mode. You can see why I see a wall of money moving into high, sustainable fully franked equity dividend streams ahead as Australian superannuants move from capital protection mode to retirement income protection mode.

We continue to have all 4 major banks, Suncorp and Telstra in our high conviction buy list on this theme and remind you of our share price targets on those stocks based of dividend yields being bid down to 6.00% in fy14. I am actually starting to think those yield based targets will prove conservative if TD’s have a 3 handle.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

Whether you agree with the advice or not, some no-nonsense words directed at teenagers have drawn the attention of parents and youth alike after going viral on Facebook.

The advice came courtesy of a principal named John Tapene, who was quoting a judge who regularly deals with youths.The judge was aiming to answer questions in the vein of, "What can I do and where can I go?"

The gist of his answer? Get out there and do something:

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Responses to the clip include enthusiastic approval, with people saying they're going to print it out and post it on their refrigerator, as well as disproval, with others deeming it far too harsh and old-school authoritarian. (The latter could be the result of the line where the judge says stop being a cry baby and to develop a backbone instead of a wishbone.)

For those who are suggesting the advice is somewhat dated, there might be a good explanation: If the Pierce County Tribune is correct,then these words date back to 1959.

According to a 2010 post on the newspaper's website, staff members came across a clipping with a letter from Judge Phillip B. Gilliam of Denver, Colo., published on Dec. 17, 1959. The website seems to suggest that the letter originally appeared in the South Bend Tribune a few weeks earlier.

The full text of what may be the original letter can be found on the Pierce County Tribune's website and it ends with different words than those presently circulating on the web -- ones that might cause more of a stir:

You're supposed to be mature enough to accept some of the responsibility your parents have carried for years. They have nursed, protected, helped, appealed, begged, excused, tolerated and denied themselves needed comforts so that you could have every benefit. This they have done gladly, for you are their dearest treasure.

But now, you have no right to expect them to bow to every whim and fancy just because selfish ego instead of common sense dominates your personality, thinking and request.

As a 'young family' you have a natural instinct to care, nurture and protect those you are now responsible for. It isn’t just about you anymore, it is about your responsibilities and knowing that your family is secure in your care. You are thinking about the things you are currently providing but, more importantly, you are already planning for the future-such as education for your children; a safe and comfortable home; and family holidays and recreational activities.

As with all life stages, you like to think that you will always be there for your family, and be able to work and provide a steady income. There is nothing stronger or more compelling than the natural instinct of a parent wanting to ‎protect their family.

Why you need life insurance to protect your family

No one plans to get sick, injured or to die unexpectedly and we all have a tendency to think that it won’t happen to us. ‘I’m too young to get cancer or have a heart attack’ and ‘I’m the safest driver on the road,’ are common misconceptions.

The first step in addressing your family’s financial security is to become aware of the risks you and your family are exposed to. One of the greatest risks you may face in your life is losing your ability to earn an income and to provide a secure and comfortable lifestyle and future for your family. Despite this being the case, many people don’t insure themselves for this risk, whilst almost everyone insures their car!

It’s worth taking a moment to consider what would happen if an extended illness or injury or premature death stopped your ability to work and provide an income. This could have a devastating impact to your family’s financial security and long-term lifestyle choices. It’s hard to imagine losing your health and your ability to go to work or even losing your life, but it is easy to imagine the practical impact the lack of an income would have.

The perfect time to put in place a life insurance plan

It is so important to consider your life insurance needs while you are relatively young and healthy, before you have any health scares and while there are still a range of options available to you. Too many people only realise the need for life insurance once they begin to experience health problems and it is often too late.

Steve Jobs, one of the fathers of the personal computing era and the founder of Apple, died 5th October 2011 at the age of 56. Although he will be remembered for ushering in fundamental changes in the way people interact with technology, he has also been known for his ability to turn a phrase – and a knack for taking complicated ideas and making them easy to understand. Below, a compendium of some of the best Steve Jobs quotes.

On Technology

“It takes these very simple-minded instructions—‘Go fetch a number, add it to this number, put the result there, perceive if it’s greater than this other number’––but executes them at a rate of, let’s say, 1,000,000 per second. At 1,000,000 per second, the results appear to be magic.” [Playboy, Feb. 1, 1985]

***

“I think it’s brought the world a lot closer together, and will continue to do that. There are downsides to everything; there are unintended consequences to everything. The most corrosive piece of technology that I’ve ever seen is called television — but then, again, television, at its best, is magnificent.” [Rolling Stone, Dec. 3, 2003]

On Design

“Design is a funny word. Some people think design means how it looks. But of course, if you dig deeper, it’s really how it works. The design of the Mac wasn’t what it looked like, although that was part of it. Primarily, it was how it worked. To design something really well, you have to get it. You have to really grok what it’s all about. It takes a passionate commitment to really thoroughly understand something, chew it up, not just quickly swallow it. Most people don’t take the time to do that.

“Creativity is just connecting things. When you ask creative people how they did something, they feel a little guilty because they didn’t really do it, they just saw something. It seemed obvious to them after a while. That’s because they were able to connect experiences they’ve had and synthesize new things. And the reason they were able to do that was that they’ve had more experiences or they have thought more about their experiences than other people.

“Unfortunately, that’s too rare a commodity. A lot of people in our industry haven’t had very diverse experiences. So they don’t have enough dots to connect, and they end up with very linear solutions without a broad perspective on the problem. The broader one’s understanding of the human experience, the better design we will have. [Wired, February 1996]

***

“Look at the design of a lot of consumer products — they’re really complicated surfaces. We tried to make something much more holistic and simple. When you first start off trying to solve a problem, the first solutions you come up with are very complex, and most people stop there. But if you keep going, and live with the problem and peel more layers of the onion off, you can often times arrive at some very elegant and simple solutions. Most people just don’t put in the time or energy to get there. We believe that customers are smart, and want objects which are well thought through.” [MSNBC and Newsweek interview, Oct. 14, 2006]

On His Products

“I don’t think I’ve ever worked so hard on something, but working on Macintosh was the neatest experience of my life. Almost everyone who worked on it will say that. None of us wanted to release it at the end. It was as though we knew that once it was out of our hands, it wouldn’t be ours anymore. When we finally presented it at the shareholders’ meeting, everyone in the auditorium gave it a five-minute ovation. What was incredible to me was that I could see the Mac team in the first few rows. It was as though none of us could believe we’d actually finished it. Everyone started crying.” [Playboy, Feb. 1, 1985]

“Every once in a while a revolutionary product comes along that changes everything. … One is very fortunate if you get to work on just one of these in your career. Apple’s been very fortunate it’s been able to introduce a few of these into the world.” [Announcement of the iPhone, Jan. 9, 2007]

On Business

“You know, my main reaction to this money thing is that it’s humorous, all the attention to it, because it’s hardly the most insightful or valuable thing that’s happened to me.” [Playboy, Feb. 1, 1985]

Q: There’s a lot of symbolism to your return. Is that going to be enough to reinvigorate the company with a sense of magic?

“You’re missing it. This is not a one-man show. What’s reinvigorating this company is two things: One, there’s a lot of really talented people in this company who listened to the world tell them they were losers for a couple of years, and some of them were on the verge of starting to believe it themselves. But they’re not losers. What they didn’t have was a good set of coaches, a good plan. A good senior management team. But they have that now.” [BusinessWeek, May 25, 1998]

***

“The problem with the Internet startup craze isn’t that too many people are starting companies; it’s that too many people aren’t sticking with it. That’s somewhat understandable, because there are many moments that are filled with despair and agony, when you have to fire people and cancel things and deal with very difficult situations. That’s when you find out who you are and what your values are.

“So when these people sell out, even though they get fabulously rich, they’re gypping themselves out of one of the potentially most rewarding experiences of their unfolding lives. Without it, they may never know their values or how to keep their newfound wealth in perspective.” [Fortune, Jan. 24, 2000]

***

“The system is that there is no system. That doesn’t mean we don’t have process. Apple is a very disciplined company, and we have great processes. But that’s not what it’s about. Process makes you more efficient.

“But innovation comes from people meeting up in the hallways or calling each other at 10:30 at night with a new idea, or because they realized something that shoots holes in how we’ve been thinking about a problem. It’s ad hoc meetings of six people called by someone who thinks he has figured out the coolest new thing ever and who wants to know what other people think of his idea.

“And it comes from saying no to 1,000 things to make sure we don’t get on the wrong track or try to do too much. We’re always thinking about new markets we could enter, but it’s only by saying no that you can concentrate on the things that are really important. [BusinessWeek, Oct. 12, 2004]

On His Competitors

Playboy: Are you saying that the people who made PCjr don’t have that kind of pride in the product?

“The only problem with Microsoft is they just have no taste. They have absolutely no taste. And I don’t mean that in a small way, I mean that in a big way, in the sense that they don’t think of original ideas, and they don’t bring much culture into their products.”

“I am saddened, not by Microsoft’s success — I have no problem with their success. They’ve earned their success, for the most part. I have a problem with the fact that they just make really third-rate products.” [Triumph of the Nerds, 1996]

“The most compelling reason for most people to buy a computer for the home will be to link it to a nationwide communications network. We’re just in the beginning stages of what will be a truly remarkable breakthrough for most people––as remarkable as the telephone.” [Playboy, Feb. 1, 1985]

***

The desktop metaphor was invented because one, you were a stand-alone device, and two, you had to manage your own storage. That’s a very big thing in a desktop world. And that may go away. You may not have to manage your own storage. You may not store much before too long. [Wired, February 1996]

On Life

“When you’re young, you look at television and think, There’s a conspiracy. The networks have conspired to dumb us down. But when you get a little older, you realize that’s not true. The networks are in business to give people exactly what they want. That’s a far more depressing thought. Conspiracy is optimistic! You can shoot the bastards! We can have a revolution! But the networks are really in business to give people what they want. It’s the truth.” [Wired, February 1996]

***

“I’m an optimist in the sense that I believe humans are noble and honorable, and some of them are really smart. I have a very optimistic view of individuals. As individuals, people are inherently good. I have a somewhat more pessimistic view of people in groups. And I remain extremely concerned when I see what’s happening in our country, which is in many ways the luckiest place in the world. We don’t seem to be excited about making our country a better place for our kids.” [Wired, February 1996]

***

“You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something — your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.” [Stanford commencement speech, June 2005]

***

“Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven’t found it yet, keep looking. Don’t settle. As with all matters of the heart, you’ll know when you find it. And, like any great relationship, it just gets better and better as the years roll on. So keep looking until you find it. Don’t settle.” [Stanford commencement speech, June 2005]

***

“When I was 17, I read a quote that went something like: “If you live each day as if it was your last, someday you’ll most certainly be right.” It made an impression on me, and since then, for the past 33 years, I have looked in the mirror every morning and asked myself: “If today were the last day of my life, would I want to do what I am about to do today?” And whenever the answer has been “No” for too many days in a row, I know I need to change something.

“Remembering that I’ll be dead soon is the most important tool I’ve ever encountered to help me make the big choices in life. Because almost everything — all external expectations, all pride, all fear of embarrassment or failure — these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart.” [Stanford commencement speech, June 2005]

***

“I think if you do something and it turns out pretty good, then you should go do something else wonderful, not dwell on it for too long. Just figure out what’s next.” [NBC Nightly News, May 2006]

***

And One More Thing

“No one wants to die. Even people who want to go to heaven don’t want to die to get there. And yet death is the destination we all share. No one has ever escaped it. And that is as it should be, because Death is very likely the single best invention of Life. It is Life’s change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Sorry to be so dramatic, but it is quite true.

“Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma — which is living with the results of other people’s thinking. Don’t let the noise of others’ opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.” [Stanford commencement speech, June 2005]

The reserve Bank of Australia (RBA) will have to cut interest rates further to boost the non-mining sectors of the economy as the mining boom fades at a time when the Australian dollar remains strong and fiscal cutbacks are intensifying.

After the global financial crisis (GFC) caution has likely resulted in a reduction in the neutral level for bank lending rates, as they are only now starting to become stimulatory.

Our assessment remains that standard variable mortgage rates will need to fall to around 6%, which implies that the official cash rate will need to fall to 2.5%. We expect this to occur over the next six months, with the RBA cutting again next month by another 0.25%.

Bank deposit rates will fall further, but the Australian share market is likely to be beneficiaries as lower interest rates eventually boost housing activity and retailing.

Introduction

The Australian economic outlook has deteriorated. Recognising this, the Reserve Bank of Australia (RBA) has cut interest rates. Our assessment remains that the RBA has more work to do. But how low will rates go? What does it mean for investors? The growth outlook while economic growth in Australia has been reasonable of late, approximately 3.7% over the year to the June quarter, and well above growth in comparable countries, our assessment is that storm clouds are brewing and that growth will slow to around 2.5% in the year ahead, which is well below trend growth of around 3%-3.25%. The basic issue is that the mining boom is losing momentum at a time when the non-mining part of the economy is weak and fiscal austerity is intensifying:

Mining investment looks like it will peak next year. For the first time in years the June quarter survey of mining investment intentions did not show an upgrade in plans for the current financial year and projects under consideration have peaked. Falling mining sector profits suggests mining projects remain at risk. Investment outside the mining sector remains weak. This all points to a sharp slowing in business investment in 2013-2014.

At the same time, a sharp fall in Australia’s terms of trade is leading to a loss of national income which will also slow spending and growth. Stronger mining exports will provide a boost to growth but this may not become evident until around 2014-2015.

This is all occurring at a time when non-mining indicators for the economy remain soft. Consumer and business confidence are sub-par, despite being almost a year into an interest rate cutting cycle.

Retail sales remain subdued, with government handouts providing a brief boost in May and June, only to see softness return again. Annual retail sales growth is stuck in a range around 3%. With confidence remaining sub-par, job insecurity running high and interest rates still too high, its hard to see a strong pick up in the near term. Ongoing consumer caution in terms of attitudes towards debt and spending is highlighted by the next chart showing a much higher proportion Australians compared to the pre-GFC period continuing to nominate paying down debt as the wisest place for savings.

A higher proportion of Australians are focused on paying down debt

While, on average, housing related indicators have probably bottomed, taken separately they present a very mixed picture. House prices are up over the past few months. Housing finance, housing credit and building approvals look like they have bottomed, but remain soft. In addition, new home sales are still falling. The fact that there has only been such a tentative response to lower mortgage rates indicates that mortgage rates have not fallen enough.

The jobs market remains soft with weak job vacancies pointing to soft employment and rising unemployment ahead. Whereas anecdotal news of job layoffs was previously limited to the non-mining sectors of the economy, it has now spread to the mining sector. This is likely fueling ongoing household caution, acting to constrain retail sales and housing demand.

The bottom line is that with the mining boom likely fading over the year ahead, the non-mining part of the economy (e.g. retailers, tourism, manufacturing, and housing and
non-mining construction) needs to pick up to fill the breach. The good news is that the RBA appears to recognise this. The bad news is that its task is being made challenging
by two factors:

First, the continuing strength in the Australian dollar, presumably on the back of safe haven buying, and moving out of the US dollar and euro in the face of QE3. In addition, the Australian dollar has a high correlation to the US share market as part of a ‘risk on/risk off’ trade, which has meant that it has not provided the shock absorber it usually does to falling commodity prices.

Second, having seen the budget handouts around mid-year, fiscal tightening will now kick in at the federal level and may even intensify if the government seeks to retain its projected surplus for the current financial year. At the same time, various states are announcing budget cutbacks, including job cuts.

In order to offset these forces and ensure that non-mining demand strengthens sufficiently, interest rates will have to fall further.

The cash rate is low but lending rates are not

While the RBA has cut the offi cial cash rate to within 0.25% of its GFC low, because of bank funding issues lending rates are still well above their 2009 lows.

Basically banks have been seeking to reduce their reliance on non-deposit funding which has proved unreliable since the GFC. To do this they have had to offer higher deposit rates relative to the cash rate than would normally be the case. This has resulted in higher lending rates relative to the cash rate than was the case pre-GFC. Banks have done well to raise the proportion of their funding they get from deposits to 53% from around 40% pre-GFC, but they still lag behind banks other major countries and tougher capital requirements mean they are under pressure to do more.

The standard variable mortgage rate is below its long term average of 7.25%. It is currently around 6.6%, assuming banks pass on around 0.2% of the RBA’s latest 0.25% rate cut. However, normally rates need to fall well below their long-term average to be confident stronger growth can be delivered. In an environment of household and business caution post-GFC, the neutral rate has likely fallen, probably to around 6.75%, which is shown as
the ‘new neutral’ level in the next chart. This would suggest that current mortgage rate levels are only just starting to become stimulatory.

In the last two easing cycles the mortgage rate had to fall to around 6.05% in 2002 and to 5.8% in 2009. Given the fall in the likely neutral level for mortgage rates and the current headwinds coming in the form of the strong A$ and fiscal tightening, mortgage rates will at least need to fall to these lows. Given the ongoing issues with bank funding, to achieve a circa 6% mortgage rate the cash rate will need to fall to around 2.5%.

Interbank lending spreads have collapsed in Europe

Our assessment is that the RBA is coming around to this view. As such we expect another 0.25% cash rate cut next month on Melbourne Cup day, followed by a cut to 2.5% in the March quarter next year.

Based on the assumption that the RBA cuts interest rates further, the global economy stabilizes and growth in China stabilizes around 7.5% next year then Australian economic
growth should pick up again by the end of 2013.

Implications for investors
There are a number of implications for investors.

Interest rates need to fall a lot further. This means that term deposit rates are likely to fall further in the years ahead, even though the size of the decline will lag that of the official cash rate given bank funding reasons. As a result, the attractiveness of bank deposits for investors will continue to deteriorate.

Bank term deposit rates likely to deep falling

While record low bond yields mean bonds are poor value for long term investors, yields will likely remain lower as the RBA cuts interest rates. However, if foreign investors start to develop concerns surrounding Australia, international bonds will do better than Australian bonds.

Australian shares should benefit from interest rate cuts and cheaper valuations. We continue to see the Australian share market being higher by year end. Key sectors likely to benefit from lower rates are retailers, building materials and home builders.

Declining interest rates in Australia will take pressure off the Australian dollar. However, a fall in value is likely to be constrained by quantitative easing in the US and central bank buying. Overall we see the Australian dollar stuck in a range around US$ 0.95 to US$ 1.10. The best has likely been seen for the Australian dollar.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.